Rectification of Errors_MBA

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    Accounting for Management

    Amity Global Business School

    Bangalore

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    Rectification of Errors

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    Rectification of Errors

    Final Accounts are prepared from Trial Balance

    Accuracy of Final Accounts, therefore,

    depends on accuracy of Trial Balance However Trial Balance is a proof only of the

    arithmetical accuracy of Ledger & Journal

    A tallied Trial Balance need not necessarilyensure error less Final Accounts

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    Classification of Errors

    Type of Error Explanation Impact on Trial Balance

    Errors of Omission Transaction completely omitted Trial Balance (T.B) will tally

    Errors of Commission These errors include:

    wrong balancing of account

    Wrong postingWrong carry forwards etc.

    This error will affect Trial

    Balance and can be easily

    located

    Errors of Principle These errors occur when proper

    distinction between revenue &

    capital is not made

    These errors do not affect

    Trial Balance and are

    difficult to locate

    Compensating Errors These errors compensate eachother. Do not affect trial balanceand are difficult to detect.

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    Sometime more than one error could be made while posting a transaction.

    e.g Purchase of Machinery for Rs.5,000 entered in Purchases Book for Rs.500

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    Suspense Account

    Used to temporarily park unreconciled

    amounts while preparing trial balance.

    Once errors are located, they are adjustedagainst Suspense account.

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    Rectification of Error

    If error is identified before preparing trial

    balance, it can be directly adjusted in the

    ledger.

    If the error is identified after preparing trial

    balance, the rectification entry should be

    adjusted against Suspense account wherever

    required.

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    Errors noticed before Trial Balance preparation

    1. A credit sale of Rs.100 to Ramesh has been entered in the

    Sales Book as a sale of Rs.1000

    2. Machinery purchased for Rs.6,000 incorrectly posted in

    Purchases account.3. A cheque of Rs.500 issued to Suppliers account towards his

    dues wrongly debited to purchases account.

    4. A sale of Rs.1,200 to David has been passed through the

    Purchase Book5. Payment of Rent Rs.5,000 has been posted twice to Rent

    account.

    6. A sum of Rs.4000 received from Guru has been credited to

    Murthys account.7

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    Important Points to Remember

    For errors noticed before preparation of trial balance,

    Suspense account should not be used while recording

    rectification entries. If the errors are one-sided errors, then the

    rectification journal entry will have only one side (either debit

    or credit)

    If errors are noticed after preparation of trial balance:-

    For one sided errors suspense account will be used to

    correct these errors

    For 2 sided errors if the debit and credit amounts of the 2

    sided errors match, suspense account will not be used. Else

    the difference between debit and credit side of the

    rectification entry will be accounted against Suspense

    account.8

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    One-sided errors before T.B preparation

    1. The Sales Book has been overcast by Rs.50

    2. The Purchases Book has been undercast by

    Rs.5003. Purchase Returns Book overcast by Rs.100

    4. Sales Returns Book undercast by Rs.1,000

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    Errors rectification after preparation of

    Trial Balance

    1. Sales day book was overcast by Rs.1000

    2. Purchase day book was undercast by Rs.2,000

    3. Discount allowed Rs.300 not posted to discount account

    4. A debtors balance of Rs.800 was not included in Debtors list.5. A sale of Rs.2,000 was posted in the ledger as Rs.200

    6. Sale of goods for Rs.300 to Sundaram was entered in the

    purchases book.

    7. Salary of manager of Rs.1,000 was debited to his personalaccount.

    8. A sum of Rs.310 written as depreciation on furniture had not

    been posted to Depreciation account.

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    Quiz 1

    The trial balance of Mr.ABC as of 31st December 2010 showed a

    difference of Rs.1,000 (debit). It was parked in suspense a/c before

    the books were closed. Pass rectifying entries and prepare suspense

    account.

    1. Received from M Rs.700 was posted to the debit of his account.

    2. Paid for repairs to Motor Car Rs.280 was debited to the Motor

    Car account for Rs.180.

    3. Discount Rs.100 received, entered into the cash book, was not

    posted to the ledger.4. A sale of Rs.370 to Nihar was entered in the sales book as

    Rs.730.

    5. Purchases returns was posted to debit of purchase account of

    Rs.150.11

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    Profit & Loss Adjustment Account

    Errors relating to nominal accounts will affect the

    profit of the business.

    The errors pertaining to previous years which are

    corrected should be shown separately so that thereaders of financial statements are able to separate

    the current years profits and impact of previous

    years errors on the profits.

    For correcting the errors of previous years, an

    account called Profit & Loss adjustment account is

    used.

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    Quiz 2

    1. Purchases of Stationery for Rs.400 was not

    posted to stationery account

    2. Rs.2760 paid for purchase of officeequipment was charged to office expenses

    account.

    3. Sales Day Book was overcast by Rs.400

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